Cash Flow Analysis

The bottom line,

below the bottom line
 Practical Use of
Cash Flow Analysis
• Why are Cash Flows important?
• Why bother?
 Practical Use of
Cash Flow Analysis
• Why are Cash Flows important?
• Why bother?

Year Y1 Y2 Y3
NI $ 703 M $ 893 M $ 979 M
NI % Grth   27% 10%
 Practical Use of
Cash Flow Analysis
Close Look at CF fro OPS (in Millions)
Year Y1 Y2 Y3
NI $ 703 $ 893 $ 979
NI % Grth   27% 10%
CF-OPS $ 1,640 $ 1,228 $ 4,779
CRR 2.3 1.4 4.9
Y1 Q1 Y1 Q2 Y1 Q3 Y1 Q4
NI $ 338 $ 289 $ 292 $ 60
CF - Ops $ (457) $ (90) $ 647 $ 4,679
What questions
CRR -1.4 are raised?
-0.3 2.2 78.0
 Cash Realization Ratio
(Quality of Earnings)
• How to calculate:
CRR = (Cash from Ops) / (N.I.)
• What does it tell: ?
 Cash Realization Ratio
(Quality of Earnings)
• How to calculate:
CRR = (Cash from Ops) / (N.I.)
• What does it tell: Income dependency on non-
cash sources Vs. Operations
(ex: mark-to-market accounting)
• What a company wants: ?
 Cash Realization Ratio
(Quality of Earnings)
• How to calculate:
CRR = (Cash from Ops) / (N.I.)
• What does it tell: Income dependency on non-
cash sources Vs. Ops
(ex: mark-to-market accounting)
• What a company wants: CRR > 1
• For AmerBran:
– $574, 128 / $328,773 = 1.7 (Great)
 Coverage Ratios
Times Interest Earned
• How to calculate:
– TIE = EBIT / Interest Payable
– CF based TIE = CF from Ops / Interest Payables
• What does it tell: ?
 Coverage Ratios
Times Interest Earned
• How to calculate:
– TIE = EBIT / Interest Payable
– CF based TIE = CF from Ops / Interest Payables
• What does it tell: Ability to cover interest charges
(Avoid bankruptcy)
• Why use CF-Ops and not EBIT: ?
 Coverage Ratios
Times Interest Earned
• How to calculate:
– TIE = EBIT / Interest Payable
– CF based TIE = CF from Ops / Interest Payables
• What does it tell: Ability to cover interest charges
(Avoid bankruptcy)
• Why use CF-Ops and not EBIT: Focus on cash
(Ignore depreciation/Accounting write-offs)
• What a company wants: ?
 Coverage Ratios
Times Interest Earned
• How to calculate:
– TIE = EBIT / Interest Payable
– CF based TIE = CF from Ops / Interest Payables
• What does it tell: Ability to cover interest charges
(avoid bankruptcy)
• Why use CF-Ops and not EBIT: Focus on cash
(Ignore depreciation/Accounting write-offs)
• What a company wants: TIE >> 1
(TIE < 1 = Solvency issues)
 Coverage Ratios
Times Interest Earned
• For AmerBran:
– Estimation:
• LTL + STD = $1,311,450
• If 10% interest => Liability of $131,145
– TIE = $603,331 / $ 131,145 = 4.6
– CF-TIE = $574,128 / $ 131,145 = 4.3
– Even if interest paid was 15%; still far from
potential default
 Coverage Ratios
Fix Charges Ratio
• Same principal as TIE Ratio
• How to calculate:
– FCR = EBIT / Fix Charges
– CF based TIE = CF from Ops / Fix Charges
• What does it tell: Ability to cover fix charges
• Low FCR could lead to: ?
 Coverage Ratios
Fix Charges Ratio
• Same principal as TIE Ratio
• How to calculate:
– FCR = EBIT / Fix Charges
– CF based TIE = CF from Ops / Fix Charges
• What does it tell: Ability to cover fix charges
• Low FCR could lead to:
– breaches of contract penalties / Lawsuits
– loose capabilities (eviction, lease repossessions)
– Asset deterioration (no $ to repair)
• Why use CF-Ops and not EBIT: Focus on cash
• What a company wants: TIE >> 1 ( < 1 = Solvency issues)
 Free Cash Flow
• How to calculate:
– FCF = OPS CF – (KTLO + Service Debt + Dividends)
• What does it tell: ?

• What a company wants: ?

 Free Cash Flow
• How to calculate:
– FCF = OPS CF – (KTLO + Service Debt + Dividends)
• What does it tell: Capacity to maintain (or
increase) dividends
• What a company wants: FCF > 0
 Free Cash Flow
For AmerBran:
• Assume Annual Depreciation is typical Asset Replacement:
$115,974
• Assume 10% interest on LT/ST Debt: $131,145
• Disclosed Dividend: $216,158
• FCF = $574,128 – ($115,974 + $131,145 + $216,158) =
$110,851

Conclusion ?
 Free Cash Flow
For AmerBran:
• Assume Annual Depreciation is typical Asset Replacement:
$115,974
• Assume 10% interest on LT/ST Debt: $131,145
• Dividend: $216,158
• FCF = $574,128 – ($115,974 + $131,145 + $216,158) = $110,851

Conclusion:
• Dividends seems sustainable
 Sources & Uses of Cash
Sources of Cash Amount % Uses of Cash Amount %
Cash from Operations $ 574,128 84% Asset Acquisition $ 260,075 38%
Short Term Borrowing $ 79,664 12% Purchase of Investments $ 30,609 4%
Long Term Debt   0% Purchase of a company $ 133,721 19%
Issuance of Stock   0% Dividends Paid $ 216,158 31%
Asset disposals $ 33,162 5% Repayment of STD   0%
Sales of Investments   0% Repayment of LTD $ 34,606 5%
TOTAL $ 686,954 100% Misc. Activities $ 6,825 1%
TOTAL $ 681,994 99%
Net Increase in Cash $ 4,960 1%
 Sources of Cash
Sources of Cash Amount %
Cash from Operations $ 574,128 84%
Short Term Borrowing $ 79,664 12%
Long Term Debt   0%
Issuance of Stock   0%
Asset disposals $ 33,162 5%
Sales of Investments   0%
TOTAL $ 686,954 100%

Conclusions on sources: ?

Cash from Operations

Short Term Borrowing
Long Term Debt
Issuance of Stock
 Sources of Cash
Sources of Cash Amount %
Cash from Operations $ 574,128 84%
Short Term Borrowing $ 79,664 12%
Long Term Debt   0%
Issuance of Stock   0%
Asset disposals $ 33,162 5%
Sales of Investments   0%
TOTAL $ 686,954 100%

Conclusions on sources:
• Borrowing comes with Liabilities
• Stock issue dilutes ownership
• Asset disposal impairs capabilities
• Sales of investments in non-repeatable Cash from Operations
Short Term Borrowing
Long Term Debt
Cash from Operations:
Issuance of Stock
• Fairly repeatable
• No stings attached
 Uses of Cash
Uses of Cash Amount %
Asset Acquisition $ 260,075 38%
Purchase of Investments $ 30,609 4%
Purchase of a company $ 133,721 19%
Dividends Paid $ 216,158 31%
Repayment of STD   0%
Repayment of LTD $ 34,606 5%
Misc. Activities $ 6,825 1%
TOTAL SPENT $ 681,994 99%
Net Increase in Cash $ 4,960 1%
Cash Ratio:
Aquision Purchase of Investments $28,912 / $1,625,218 = 0.018

ase of a company Dividends Paid Quick Ratio:

$785,064 / $1,625,218 = 0.48
meny of STD Repayment of LTD

ctivities Net Increase in Cash Questions raised: ?

 Conclusion
Facts on AmerBrand:
• Quality Earnings (Cash Realization Ratio = 1.7)
• Not exposed to imminent bankruptcy (TIE = 4.3)
• Questionable cash management (QR = 0.48 yet only 1% cash preserved)
• Sustainable Divided (FCF = $110,851)

For Management Consultants:

• Suggest revision of cash management/investment strategies

For Investors:
• Solid operations and sustainable dividends
• Buy as long as economy is doing well
• Keep an eye on company’s cash levels